Transforming Supply Chains with John Gattorna

Patrick Daly (00:09):

Hello, this is Patrick Daly, and welcome to Interlinks. Interlinks is a program about connections, international business, supply chain, and globalization, and the effects these have had on our life, our work, and our travel over recent times.

Patrick Daly (00:23):

Today on the show, we will be talking to John Gattorna, founder and principal of Gattorna Alignment, a boutique advisory firm based in Sydney, Australia that works with selected clients around the world to help them develop customer focused and innovative supply chain strategies.

Patrick Daly (00:39):

John is one of the most respected supply chain thought leaders in the world today. So never has this mission to develop and implement innovative solutions been so important for everybody as it is today as our supply chains emerge reeling from the impact of COVID, and must now phase into doing a lot of the heavy lifting on the road to decarbonize our global economies in the coming years.

Patrick Daly (01:01):

So welcome, John, and thank you very much for being here with us today.

John Gattorna (01:04):

Thanks, Patrick. And nice to be with you.

Patrick Daly (01:07):

You’re very welcome. So John, your career stretches back over several decades and includes executive [crosstalk 00:01:13] corporate sector, academic research, university professorships, authoring several books, and now thought leadership through your boutique advisory firm. Could you tell us a little bit about your career milestones and how they came to shape your view and conceptualization of supply chains today?

John Gattorna (01:29):

Mm-hmm (affirmative), well, I started off as an engineer, did an engineering degree at Melbourne University and worked as an engineer for about nine years. And in that time, I worked for a public works type of road construction authority, and two American companies. I worked for Vickers Detroit Hydraulics and also another company called FMC Corporation, both of them American. It was a good experience for me, but towards the end of that, I was getting a bit fed up of engineering and did my MBA at Monash University, also in Melbourne.

John Gattorna (01:58):

Now it was during that time I met Mark Doctoroff. Mark Doctoroff was a Fulbright scholar, he was out from Canada, and he was the one that brought the idea of teaching physical distribution, what was that called in those days, in the mid-70s, to Australian Universities. And I did it, and I got sort of hooked on it, and I got to the stage where the interest or the hobby became greater than the career, as it were. I decided, “Boy, I think I might get into this.” Looking back on that it was an amazing preconception because four decades later, if I could have imagined that everyone would be talking about supply chain, and yet back in those days, no one even knew what logistics was, it was just a very lucky break.

John Gattorna (02:46):

Anyhow, make a long story short, I decided to go and do my PhD to leapfrog into the field and looked around and decided to go to Cranfield. I knew Martin Christopher, I knew Gordon Wills, David Walters. There was a whole group of them that’d come down from Bradford to start the new business school at Cranfield. I arrived about three years later in ’75 there and started to do my PhD. And really, we stayed there for five years, I almost got to the point where we just decided we were going to stay in UK, to tell you the truth, but we had two young boys and the weather was getting us down, so we decided to come back to Australia and we came back here.

Patrick Daly (03:28):

The [crosstalk 00:03:28].

John Gattorna (03:28):

And when I came back, the only way I could get back in was to take an academic job at University of South Wales, teaching marketing and logistics. But to answer your real question there, I guess my mindset was really framed at Cranfield because they are unique, there Martin Christopher’s approach to logistics was very much the marketing logistics. In other words, it wasn’t an operational field, it was very much a field that focused on the customer and that’s the way it was researched and taught.

John Gattorna (03:57):

So when I came back to Australia, I taught it that way. And then after a few years, I got fed up with the academic scene here because it was not a shade of what it was at Cranfield. So I started my own consultancy in the mid-80s and built it up over 10 years and to the point where Anderson consulting approached me, and eventually became Accenture, and bought my business and I went and started there. And that was a break for me because I was getting to a stage where I needed a bigger pond to swim in, as it were, and that gave me a lot more resources. And I built the whole Asia-Pacific practice up over seven or eight years and retired from that in 2003-4.

John Gattorna (04:36):

Now for a couple of years, I sort of recovered, but then there were people calling and wanting to do stuff, and then that’s when I got the idea, “Why don’t I get a small group of us and just work solely on, not ordinary stuff consultants do, but wicked problems, and try and develop a theory.” Because the big problem in all through this was that logistics and then what became supply chain, it was very operational and it didn’t have a lot of underpinning conceptual strength. And so, a big part of my life then was to concentrate on developing frameworks and templates which would guide us in the design and operation of our contemporary supply chains, and that’s what happened.

Patrick Daly (05:18):

And one of the key ideas I think that possibly came out of that was this idea of dynamic alignment.

John Gattorna (05:24):

Yes.

Patrick Daly (05:24):

So, what is the essence of this idea and what does it look like in practical implementation?

John Gattorna (05:29):

Well, it’s funny because I was very fortunate when I first got back in my consulting I was joined by a guy who came from South Africa, who had a PhD, and his strength was very much looking at… In fact, his PhD had been all around this idea of aligning internal culture with a strategy. And his hypothesis is that if you don’t actually align the internal subcultures in the business with the strategies that you write down, you get a lot of spinning of wheels and you end up not delivering the strategies you said you were going to deliver. Now that, we all know this has been a problem for years, implementations are never as good as we thought.

John Gattorna (06:10):

And he joined me in the business early on and we started talking about this concept of alignment, but extending it. We said, “Well, why don’t we go further out and look at the marketplace and say, ‘What is the marketplace telling us?'” And then we had the strategy bit in the second level, and we had the cultural bit at third level, and the fourth level we added was leadership. And we came up this idea, and we wanted to test it. It was a business model, it wasn’t a supply chain model in first instance, it basically said, if you want to run a business, and make money, and do well, or it could be a not for profit, there’s four things you’ve got to line up. You’ve got to understand your customer’s expectations, align and come up with value positions which beat those, and the third level is create subcultures in the business that can propel these value propositions into the appropriate segments.

John Gattorna (07:09):

And finally, you need a leadership at the top that understands what’s happening in the marketplace and therefore knows how to shape the cultures to drive the strategies. And the fascinating thing was that we had all this conceptually, and then people started asking us, “I’m sick of this one size fits all supply chain…” You know, the big question then became, well, if one size fits all is flawed because it implies that all customers are the same, and therefore we have one supply chain meeting them. The question then becomes, if one size fits all is flawed, how many supply chains running through the business, or pathways, do you need impractical terms to actually get about an 80% fit to the marketplace? Because in a lot of companies, the one size fits all was creating about a 10% fit, and everyone else, and then creating too many exceptions.

John Gattorna (07:58):

And so we spent years, and I mean decades, researching and working with companies, until we found the answer. And the answer, was 4+1. The +1 is the extreme situation, which you’ve just seen with COVID, where you do something incredible, you forget about costs, you just have to be creative in overcoming disruption. But the four, sort of business as usual type supply chains really came from us understanding that there were four major behavioral segments that we found for most products and services, out of a possible 16, but there were four that we saw a lot of, and that was the segment that tended to buy on loyalty, and would share things and be collaborative. The segment that was just looking for lowest price reliable, people call that the lean segment. The agile demanding segment, that’s sort of opportunistic and won’t share.

John Gattorna (08:50):

And one that we found later on, we called it the project segment, or campaign segment, where in a major construction, you need a different supply chain than you do an FMCG. And so we started testing all these in depth with companies like Venture Challenge in New Zealand, Schneider Electric, globally. Shell, Unilever, and everywhere we went and everything we did with it, it just got better and better. And it just proved our point that supply chains are actually driven from outside in, and we’ve got to get away from just designing them from inside out, as it were. And that was our big thing, and practical breakthrough.

Patrick Daly (09:28):

Sounds like a systems approach, a whole of business approach to thinking about the supply chain.

John Gattorna (09:33):

Yeah.

Patrick Daly (09:34):

So, you know how in companies you get siloed disciplines, so how are the best companies managing this? Is it through having maybe a supply chain supremo in the business, or educating all the departmental heads in supply chain, no matter what their specialization? So how is that done in practice?

John Gattorna (09:49):

Well, in practice, the best companies have CEOs that have a vision, that meeting customer expectations and improving customer satisfaction is the way to go. The question is, well, how to do it? And say, in the case of Schneider Electric, the chief exec there, they had a very good company running, they’d made great product. And they initially started to try and re-badge some of their production people as to become supply chain people, and it just didn’t work. So the CEO went out and he head hunted and found Annette Clayton who’d come through General Motors and was working for Michael Dell in the high tech industry at that time. And she came across, and I had met her early on when she arrived.

John Gattorna (10:34):

And she brought into this whole idea that the verticals are fine, we need specialisms in production and finance, and marketing and so on. But actually, the customers buy horizontally. And because, particularly when you got to around 2000, and customers started using the internet, and things started moving very much faster. It was impossible for a functional head to run a vertical and also be part of a horizontal. And that’s when companies like Zara recognizing that they’re in the fast fashion business and they had to do something different. They started, and others like Adidas tried it as well, and a number, they [inaudible 00:11:18] people out of those functions and put them together in a multidisciplinary team, and then focused them on particular segments in the market. Which, like cross-functional flows, that went across those functions. But they had contacts with those people because they had informal contacts with people inside their own team contacting and being in touch with the people.

John Gattorna (11:37):

And that’s really, I can’t think of a better model. It’s not a matrix model, it’s a dual model where they both, the vertical and the horizontal, work in sync, help each other, with both of them having KPIs, which contribute to get getting maximum custom satisfaction and doing it quickly. And that’s really what the strength of Zara is, and people like that because they’ve been able to increase the clock speed of their business to roughly about, I don’t know 15 days, against the nearest competitor 30 days, or a department store might be 120 days. So the organization design is crucial to tell you the truths, yeah.

Patrick Daly (12:16):

You mentioned there along the way, this concept of outside in thinking, so what is this? And what are the implications of it?

John Gattorna (12:23):

Look, the problem is that for the first 50 years, from about ’67, when supply chain was first written about in the Harvard Business Review for the first 50 years, we had people sitting in businesses with all the right intention saying, “I think the customers want this.” Most marketing departments or commercial departments weren’t really telling or helping the logistics arm of the business. They just expected them to, from virtually a standing start, to do a good job. You can’t do that.

John Gattorna (12:56):

So the idea of outside in is to say, how do we, as a supply chain group, get a direct link and understanding of the customer’s expectations? And in the case of Schneider Electric, we didn’t just ask marketing Annette Clayton had such credence with her chief executive that she had our own budget and we went and did our own research. So, it’s about segmentation really it’s about segmenting customers. Don’t segment them along institutional, industry lines, or big or small, or profitable, those things. You’ve got to segment them based on what expectations do they have as they look back towards their supplier. Is it they’re looking for a safe sort of relationship for which they’ll pay a premium? Or, is it they’re looking for the lowest cost, leanest sort of supply? Or, are they looking for something quick response from time to time?

John Gattorna (13:51):

And the real complication is that the same customer can have different buying behaviors depending on the situation they’re in, so they could be lean one day and then suddenly they’ve forgotten something. They want a quick response, so they want an agile response. And that’s why the word dynamic has crept into this, that you have to design a range of processes inside your business so that you can switch a bit. It’s a bit like switching train tracks, a product can switch across and be delivered in different ways depending on how the customer wants to be serviced. And it could mean different pricing, different time schedule, different packaging, even different branding.

John Gattorna (14:31):

And that’s the bit that’s really stumped it’s made it very difficult to do because many marketing people thought that you could segment customers and put them in a box and just assume that that’s what they were at forever and that they would stay there. But the answer is, the customer’s moving. So if we have a static supply chain and the customer’s moving, we’re always having to follow the customer. And it becomes a question of exceptions, whereas if you’ve got four or five guns pointing out the window and the customer’s moving, you just start to pull the levers depending on what approach the customer is requesting. So that’s the way it is.

Radio Announcer (15:08):

93.9 Dublin South FM.

Patrick Daly (15:11):

Yeah. In your latest book, Transforming Supply Chains, published just in 2020, of which I have a copy here on my desk. You speak about this and you set out these five main supply chain types, which I think are the collaborative supply chain, lean, agile, campaign, and fully flexible. So could you just set out briefly the key distinctions between those types?

John Gattorna (15:32):

Yeah, basically they’re the mirror image of the segments that they’re serving. So the collaborative supply chain is very much servicing that group of customers that we know as generally collaborative. I know, this word collaborative has been overworked a lot, but in every market, every product market situation we’ve found, is that there is some percentage of collaborative customers who… And the best way to gauge whether customers are generally collaborative is if they will share their data with you. So if you’ve got people who will share with you what their forecasts are, or sit down with you and therefore that makes life very easy. The cost of producing for those people is a lot less because you’re not having to use a lot of capacity, you know exactly what you want for them, and everything’s scheduled, and they pay a premium and they’re risk averse, and that’s great.

John Gattorna (16:22):

The next group is the transactional customers that probably are 40 to 50% in some markets, and that’s the lean supply chain. And basically they don’t want any of this relationship stuff. The great thing about them is they tend to buy the same thing all the time, so if you look at your data, you can sort of see what people are buying and you can forecast. So for both collaborative and lean supply chains there’s a fair bit you can do around forecasting and getting it pretty right.

John Gattorna (16:51):

But then you move beyond that to what we call the dynamic customer, or the demanding customer, who’s opportunistic, they don’t share anything, they turn up on your doorstep and you haven’t seen them for three years. Yet, they want this, they want that. You can’t see them coming. And so to service them, you need to carry a lot of redundant capacity in your system. And that’s the fashion market for you to some extent. If you go to look at Zara’s outfits, it’s amazing, though they control it to some extent because a lot of their fashion is going into their own stores, they still have surges of product coming from their suppliers, and some of their own factories, into their DCs and out again. And if their DCs weren’t empty, then they wouldn’t be able to absorb them, on top of sort them out and send them out. So, the big problem with the agile supply chain is it does require capacity, redundant capacity, and that costs some money and the big problem is people want agile response for lean price, if you like, right?

Patrick Daly (18:00):

Yeah, yeah.

John Gattorna (18:00):

And then there’s what we call the campaign supply chain, which is big projects like London Airport it takes several years, a lot planning involved, putting assemblies together, everything. It’s not just like making baked beans in a factory and shipping it to a wholesaler, there’s a lot of design work, a lot of assembly, a lot of crane lifts, and putting things together, it’s a different sort of supply chain. We call that the campaign supply chain, and it’s all about grouping things together and making sure that the products that you’re going to use in putting these assemblies together are not stolen by another part of the company and shipped out somewhere, and suddenly you end up on site with something that’s short and you’ve got to expedite it. So they’re the four main ones.

John Gattorna (18:44):

And then the final one is the fully flexible supply chain, which is a positive and negative if it could be used in a time of great disruption, like a volcano like we saw in Iceland years ago, or the floods in Thailand, where it creates havoc with production. You need to have thought through what you do in advance. Have you got alliances? Have you got other sorts of substitute suppliers that you could pull in? And at a national level a very good example of it is the bush fires. You know, the Bush fires in Australia, or the bush fires in Southern Europe, none of those governments have got enough equipment to fight them. So whole governments take equipment, they help each other. They bring in air tankers, and send people across, it’s the same at the company level, you’ve got to do a lot of thinking so that when the (beep) hits the fan you can’t just start thinking about what you’re going to do, you’ve set it all up.

John Gattorna (19:37):

The positive side of fully flexible, another example of that is chocolate, Easter eggs if you like, you spend a year building up and then you release them on the day, so there’s a massive sort of distribution if you like throughout the country in a very short time, that takes a bit of creativity. So they’re the five that tend to pretty much cover, but there’s some variations around those because in behavioral terms, there’s about 16 if you talk to the psychologists, there’s about 16 different mindsets that we in human race have.

Patrick Daly (20:11):

And I, as a business person then, how would I find out from my customer profile who’s who? Would I be going into my data, my order data records, and doing analysis to find out?

John Gattorna (20:25):

Yeah. Yes, you can.

Patrick Daly (20:26):

And is the implication of that then that most businesses will have to be able to work on under five? Or, would it tend to be one principle, and then maybe two or three of the others? How does that pan out?

John Gattorna (20:38):

You can make some choices, yet there may be you’ll find that those five will be present, but four of them, the last one is something that happens only in extreme conditions. But of the four you’ll find that the only thing that differs from country to country, or product to product is the different proportions. You know, in some country products you may have more lean. Or, if you go to South America, they may be more collaborative.

John Gattorna (21:00):

But to come back to your original question, a lot of it’s in the data. That’s why I say to people, frankly, if you’re a billion dollar firm and you haven’t got a bunch of data analysts culling through your data, conducting analysis, like coefficient of variation, where you look at the fluctuations in the actual demand data, you can actually see the base load type data, which is largely repeat buying, which is that collaborative demand pattern, or even some of the lean shows a very sort of shallow…

John Gattorna (21:34):

But when you see big spikes like that, it’s clearly you’ve got some agile thrown in. One thing, one analytical approach won’t help you. The other sort of corresponding thing you do is, from time to time, and you don’t have to do this very often, but every maybe five years, you go out into your marketplace and you do some sampling and you use conjoint analysis, or trade off analysis techniques that they use in marketing all the time, and marketing people have been using this conjoint analysis for years, where you just don’t go to people and say, “What would you like?” Because they’ll say, “I’ll have everything.” You give them a number of choices and you force them to trade one thing or another. And the combination of those techniques and the data you start to see broadly what…

John Gattorna (22:19):

And it doesn’t have to be accurate. You might see that roughly 10% of my market is collaborative, 40% transactional, 30 or 40% is agile, and 15% is a campaign, and 1% is fully flexible. Once you know that you can do some reverse engineering to make sure you’ve got those sorts of things covered.

Patrick Daly (22:39):

And you’ve got to be updating that I guess, because next year it might be different, or in five years-

John Gattorna (22:42):

Yeah, well the good news is that it doesn’t change rapidly unless something really desperate happens, which is what’s happened just recently with COVID, it has actually changed the buying behavior hugely because what it, by having people isolated at home, there’s been a big shift away from spending money on services, and restaurants, and traveling and all that stuff. And what are people doing? They’ve embraced e-commerce.

John Gattorna (23:09):

And so you’ve seen the amount of e-commerce has gone up, I can’t remember the figures now, but it was something like… the growth has been about 20 or 30% per annum in the last few years. And then in the last year or so, it’s been about a 40% increase in e-commerce over just standard sort of purchases. So, the big trick here of course is when things flatten down again in another year, or 18 months, after COVID settles down, will people go back completely to where they are? Or, will they stick with a lot of this e-commerce, which is very demanding because it’s very much the expectation of short lead times.

Patrick Daly (23:52):

At, Gattorna Alignment, your firm, you a run supply chain retreat series each year-

John Gattorna (23:58):

Yep.

Patrick Daly (23:58):

… in different venues around the world. And for 2022, the theme of the series is resetting global, regional, national supply chains for a post-COVID world. So what are the major factors and trends that you’ll be examining then in this next series?

John Gattorna (24:12):

Well, I think what we’re going to try to do is bring to people’s direct attention that we are now in a post-COVID, now in a sort of two tier world, if I could call it that. We reckon business as usual volatility is probably going to be greater than we’ve seen before, so we could be looking at 30 or 40% fluctuation in supply side and demand side. Because supply side is also a problem with components, and things coming in, and raw materials. And we want to talk about what sort of supply chain configurations can cover that type of fluctuation. And then on top of that, we’ve got to be prepared with the fully flexible supply chain to cope with a once in 10 year, or once in 20 year extreme fluctuation, which may happen at the regional level, it may be a flood, or it may be something like that. Or, it could be another virus getting out of China and creating havoc across the globe.

John Gattorna (25:09):

And the major part of it is we are trying to get people a way… we’re looking at this idea of de-globalization, if I could use that term. I think globalization has gone too far, driven by procurement people who have had KPIs to reduce cost of all costs, sort of thing. And so they’ve extended our supply chains to extreme lengths. What we want to do is reduce the length of our supply chains. So look for regional and local sources of supply, so that if things go wrong, we’re not extended so far. And we want people to start changing their priorities around, from again lowest cost at any cost to resilience. And saying, “Look, we want to be able to survive the volatility of the future. Yes, we may have to pay a bit more, but isn’t it better to be around than forced out of the business?” So that’s really what reset is, trying to get that balance right, Patrick.

Patrick Daly (26:07):

Sounds like we, maybe after the 2022 series there might be another book in the pipeline after…

John Gattorna (26:11):

I think there is. Every four or five years, the blood rushes to the head and we’ve got enough content in our heads to get it down on paper and get it out there. We love doing that because that’s part of our whole vision, if you like, is to develop our thinking and then put it out there for people to use and interpret.

Patrick Daly (26:29):

Okay. So as we come to the end, now how can listeners find out more about you, about your work, your thinking, your writing, and of course the supply chain retreat series?

John Gattorna (26:37):

Well, look, I think Patrick, the best thing is to go on our website. Everything I do, my blogs, articles, books, et cetera, they’re all on www.GattornaAlignment.com, or www.JohnGattorna.com, either one. And there they’ll also see some details around the forthcoming series of global retreats. Which by the way, another forum for us to take a small group of senior people and explore some of these things that we’ve been working on over… in this case, we’ve missed the last two years, so we’ve got quite a buildup of material to discuss, and we love doing it because we get back into that interactive mode. Zoom’s been useful, but it’s not the same as having a good pow wow locked in a room with 30 very motivated people.

Patrick Daly (27:25):

Sure. So that’s GattornaAlignment.com?

John Gattorna (27:27):

Alignment. Yeah, just one word. GattornaAlignment, one word www.GattornaAlignment.com.

Patrick Daly (27:33):

And Gattorna has got two Ts.

John Gattorna (27:35):

Yeah.

Patrick Daly (27:35):

Is Gattorna is that Maltese, Italian I think?

John Gattorna (27:39):

No, it’s Italian. It’s got two Ts, G-A-T-T-O-R-N-A Alignment, just the normal word alignment. And that’s the whole idea that everything we do, we’re trying to… We started out business to business alignment, then we realized that within businesses, there’s a whole lot of strands running through a business and we’ve got to make sure they’re lined up. And in many ways the analogy I’ll make, we use the sort of term it’s the supply chains now are very much the central nervous system of our business and our enterprise. So yeah, it’s Italian descent out Genoa a long time ago, but we’re here in Australia now. And in fact, I’m going to write a book about the family when I get a chance, but I haven’t got time at moment.

Patrick Daly (28:18):

Okay. Excellent, very interesting. I look forward to that. So thank you, John, it’s been an absolute pleasure, and wish you the very best for the upcoming series in 2022.

John Gattorna (28:26):

Thank you. And we’ll make sure… Well, you’re coming to one of them anyhow, so you’ll get a firsthand view of it Patrick.

Patrick Daly (28:33):

Yes, I’m looking forward to it very much.

John Gattorna (28:34):

Okay.

Patrick Daly (28:35):

So thanks also to our listeners for tuning in. Any comments or questions, just drop me a line on Pdaly@AlbaLogistics.com. Keep well and stay safe, until next time.